1) You are considering an investment in the stock market and have identified three potential stocks, they are Crown (ASX: CWN), Tencent (HKG: 0700) and Commonwealth Bank (ASX: CBA)

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1) You are considering an investment in the stock market and have identified three potential stocks, they are Crown (ASX: CWN), Tencent (HKG: 0700) and Commonwealth Bank (ASX: CBA). The historical prices for the past 10 years are shown in the table below. Assume no dividend is distributed during this period.

Year	Crown	Tencent	Commonwealth (CBA)
2010	7.76	29.04	53.63
2011	8.57	40.40	52.15
2012	8.09	37.94	50.39
2013	11.59	54.28	64.10
2014	16.68	108.70	73.83
2015	13.61	132	88.85
2016	12.27	144.90	78.67
2017	11.4	204.40	81.66
2018	13.25	463.60	78.87
2019	11.95	346	69.91

1. Calculate the correlation coefficient between (a) Crown and Tencent and (b) Tencent and CBA
2. Calculate the expected (annual) return and standard deviation if you owned a portfolio consisting of 50% in Crown and 50% in Tencent.  
3. Calculate the expected (annual) return and standard deviation if you owned a portfolio consisting of 40% in CBA and 60% in Tencent.

2.

Company ABC has just announced earnings of $2 per share. Based on the last five years, earnings have grown at a rate of 20% per annum and the company expects this to continue for the next five years, after which it expects earnings to remain constant forever. The company has a policy of paying out 30% of its earnings as dividends. ABC stock has a beta of 1.2. The yield to maturity on 10-year government bonds is 2% and market risk premium is 10%.

(a) Calculate the current value per share.

(10 marks)

(b) If the stock is currently trading in the market at $10 per share, comment on whether any profits can be made. What form of market efficiency prevails if this occurs? Examine the other two (2) forms of market efficiency and what the observation on the stock price here implies in terms of market efficiency.

(10 marks)

(c) The company plans to issue a 7-year bond in the near future to finance expansion into neighbouring countries. It expects interest rates to fall in 3 years’ time. State and describe two (2) possible types of bonds the company could issue. Analyse how the company can determine the pricing for its bond issue?

3.

Gerald has taken out a loan of $100,000 today to start a business. He has agreed to repay the loan on the following terms:

• Repayments will be made on a monthly basis. The first repayment will be made exactly one month from today.

• The repayments for the first 5 years will cover interest only to help reduce the financial burden for Gerald’s business at the start.

• After the 5-year interest-only period, Gerald will make level monthly payments that will fully repay the loan after an additional 15 years (i.e. 20 years from today, the loan will be fully repaid).

• The interest charged is 5% p.a. effective.

10 years have passed, and Gerald’s business is doing well. Further, he has made all the repayments on his loan so far as described above, and has just made the repayment due today. However, it has just been announced that the interest rate on Gerald’s loan will go up to 5.5% p.a. compounding semi-annually.

a) Calculate the new equivalent effective monthly rate on the loan. (1 mark)

 

b) Calculate the current loan outstanding (again, it is 10 years after the loan was initially taken out). Note that the new interest rate only applies from today onwards. (2 marks)

 

c) Because Gerald’s business is doing well, he decides to repay a lump sum of $10,000 immediately. To further reduce the amount of interest he is paying to the bank, he will increase his monthly repayments to $1,000 per month. How many full repayments of $1,000 does Gerald have to make in order to fully repay this loan? (Note: Gerald may need to make a further, smaller payment in the subsequent month) (2 marks)

 

d) Calculate the size of the smaller payment.

4. 

As a senior analyst for the company, you have been asked to evaluate a new IT software project. The company has just paid a consulting firm $100,000 for a test marketing analysis. After looking at the project plan, you anticipate that the project will need to acquire computer hardware for a cost of $450,000. The Australian Taxation Office rules allow an effective life for the computer hardware of five years. The equipment can be depreciated on a straight-line (prime cost) basis and there is no expected salvage value after the five years.

Your company does not have any available space where the project can be located for five years and you anticipate a new office will cost $65,000 to rent for the first year (same cost for the remaining years). You expect that the project will need to hire 3 new software specialists at $50,000 (each specialist) per year (start in year 1) for the full five years to work on the software (same cost for the remaining years).

The project will use a van currently owned by the company. Although the van is not currently being used by the company, it can be rented out for $15,000 per year for five years. The book value of the van is $20,000. The van is being depreciated straight-line (with five years remaining for depreciation) and is expected to be worthless after the five years.

Expected annual marketing and selling costs will be incurred during the life of the project (5 years), with the first year expecting to be $250,000. The produced software is expected to sell at $85 per unit while the cost to produce each unit is $40. You expect that 10,000 units will be sold in the first year and the number of units sold will increase by 25% a year for the remaining four years. The project will need working capital of $50 000 to commence the business (in year 0) and the investment in working capital is to be completely recovered by the end of the project’s life (in year 5). The company tax rate is 30%, and the discount rate is 10.5%.

Based on the information presented above, answer the following questions (1) – (3).

1. (3 marks) In evaluating the new IT software project, are the cost of $100,000 spent on marketing analysis? Explain your answer(s).
2. (12 marks) Calculate the incremental free cash flow during the project’s life (starting from year 0 to year
3. (10 marks) Calculate the NPV, payback period, and IRR